Eurozone markets: Insurance hike in a likely shallow cycle
Door open for another ECB hike.
Group Research - Econs, Radhika Rao12 Jun 2026
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The European Central Bank raised the benchmark deposit rate by 25bp to 2.25%, a first hike in nearly three years. President Lagarde noted the build-up of inflationary pressures and warned of the risk that they could become more broad-based. Baseline ECB projections for growth were tempered, while inflation were revised up - growth in 2026 is seen at 0.8% yoy before improving to 1.2%, while inflation is set to peak at 3% this year before cooling off to 2.3% in 2027. Core is expected to stay above target this year and next at 2.5% before easing to 2.2% in 2028. The IMF also revised down its forecast for Eurozone growth to 0.9% from 1.1% for 2026, in its latest update. 

Officials didn’t commit to the future course of action, but the ‘insurance’ hike was intended to stay on-top-of-price developments, rather than fall behind the curve, in the event the West Asia conflict spills over to second half of the year. This would also help counter the market perception that policy tightening was initiated too late in 2021–22, when the supply shocks stemming from the pandemic and the Russia–Ukraine conflict proved to have a more persistent impact on inflation than initially anticipated. Market pricing point to two modest hikes by year-end. At this juncture, economic data has softened, but by a modest scale. Composite PMIs for May were revised up in the final reading, while the European Commission’s economic sentiment indicator ticked up slightly in May on ceasefire expectations, even as the overall mood in manufacturing and service industries was downbeat. May inflation climbed to 3.2% yoy, marking the third month of price growth exceeding the 2% target, accompanied by an uptick in core to 2.5% (from April’s 2.2%). Overall, we maintain our call for another 25bp hike in 3Q26, with uncertainty surrounding the trajectory of the US-Iran conflict likely to keep the policy decision finely balanced between a pause and a modest rate hike during this period.

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

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